- We prefer to look for high profit margin, high volume business model. Is there an absolute net or gross profit margin number that we use that tends to correlate with better scalability of business model?
- Using Sheng Siong as an example, can I check if this assessment is accurate:
“My impression is that it is a company that has low margin and high volume. The business is not asset light given that it has to own/lease a substantial amount of retail space for its supermarket outlets. This is confirmed by the fixed asset to total asset ratio in 2021 and 2020 being around 50%.”
- Since it is asset heavy (can I say this? Is there a number for the ratio to look for?) and price appreciation since 2011 is only 3-4x, can I say that I would not spend more time analysing this stock as a potential growth stock? Furthermore it is in a defensive, consumer staple industry.
- But, Sheng Siong seems to fulfil the criteria of having high FCF/E ratio. I briefly calculated it back to 2017 and it’s >10% consistently. Example calculation for 2021: (172.7-31.7)/413.4=34% is correct? In the context of non-asset light company, is this less relevant when looking for a growth company?
- When looking at margins, I focus mainly on gross profit margin. The company have enough gross margin to deduct the expenses. My benchmark for GPM is at least 20%.
- Yes, Sheng Siong is a low-margin business. As for volume, I will say they are only confined within Singapore. Even though Sheng Siong have a FA/TA of 50%, I will still consider them asset-light because they have a negative cash conversion cycle. They can take the product from suppliers to sell without coming out with cash. Their leases are operating expenses, not fixed assets. (Do note: asset-heavy business are classified as FA/TA of above 60%)
- The company is a dividend stock rather than a growth stock since its volume is only restricted in Singapore. I think that they have almost maxed out their potential already.
- As mentioned in point 2, I think Sheng Siong is an asset-light business. Your calculation of FCF/E ratio is correct.
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